Spending credit is a dangerous game
To the editor:
While most Americans remain clueless about the frightening vulnerability of the global financial system, a few people in the country are at least aware of the incredible federal deficit which can never be paid back. But the deficit is only a symptom. Let's all try to comprehend the root cause of what will prove to be an inevitable calamity.
Yes, a desperate government can do great damage to your assets, but the real problem centers around the quantity of real physical dollars. You see, consumers spend over $11 trillion annually. But there is only $1.2 trillion actual dollars (physical money) in the world. And the estimate is that 50 to 75 percent is in overseas bank accounts or held by foreign governments. The rest is in the U.S., but it is considered "dead money" held by citizens under the mattress or in safe deposit boxes. The banks' physical dollars are also dead since they are not being lent out into the economy. In fact, the amount of dead money is at an all-time high.
Here's the point: it is estimated that there is only $250 billion actual U.S. dollars circulating in the United States. The government spends $3.5 trillion each year. So if there are only $250 billion physical dollars, where are all those trillions of dollars coming from, and what would happen if they suddenly disappeared?
Monetary velocity is the number of times that a single unit of real currency is circulated. And right now velocity is at the lowest point in history. People are not spending that $250 billion in real physical dollars. Hiding out under mattresses and in safe deposit boxes, the real money, the only legal tender in the country, is truly being hoarded and is therefore dead.
So people are spending something else. They are spending CREDIT which is another word for DEBT. Credit is not real money.
Since the 1970s credit has been growing exponentially to a remarkable $60 trillion, while at the same time wages, adjusted for inflation, has been plunging, and, as I mentioned, people are holding on to their dollars (monetary velocity.) So credit is what people spend. And since credit is not money, they are playing a dangerous game.
Credit is nothing more than confidence, promises and IOUs. The entire American economy is built on credit. And the problem with credit is that it can only exist if people believe they will get paid back. They must believe that there is enough money in America to pay back the 60 trillion in outstanding credit. But, of course, the truth is, there isn't. Our credit system is insolvent. And when it fails, which it will surely do, it could wipe out more wealth than any other crisis in history.
To be continued...